The International Financial Reporting Standard 9 (IFRS 9) will fundamentally change accounting practices by requiring firms to consider the impact of possible future events when calculating their capital provisions. With implementation set for 1 January 2018, and parallel runs for the larger institutions scheduled to take place just next year, banks are currently at the most intense stage of preparation for the new regulatory standard.
Due to the approaching deadline and implementation of IFRS 9 across the industry, the Center for Financial Professionals speak to leaders in the field to understand the industry trends and upcoming challenges.
When looking at the disclosure requirements of IFRS 9, what do the new requirements say about a business?
N.W: That’s a question many people are asking, but few answering! As IFRS 9 is both complex and principle-based there is scope for the methodologies to vary between entities. One objective of disclosures is allowing readers of accounts the ability to see the affects of these different methodologies. Enhanced comparability will be one success factors that IFRS 9 disclosures will be measured against.
By its nature IFRS 9 will provide more detailed information about impairment provisions than the current accounting standard, but whether this results in a better understanding of the credit risk businesses are actually facing remains to be seen.
In your opinion, what governance structure is required to support IFRS 9 compliance?
N.W: I don’t think we’re starting with a clean sheet of paper here, but IFRS 9 will put greater demands on governance. A deeper understanding of the component parts of the model and how it all fits together, including with other reporting bases and risk outputs, will be required by those taking decisions. The level of subjectivity around forward looking information also needs to be considered.
What main supervisory issues and concerns should financial institutions be aware of?
G.S: Regulators have a strong interest in promoting a robust and high quality implementation of the IFRS 9 ECL model. That was the reason for the BCBS and the EBA to develop Guidance on the accounting of Expected Credit Losses. The Guidance is about the most prevalent concerns of supervisors related to the IFRS 9 ECL model – to limit the application of ‘practical expedients’ and to pronounce the need to appropriately consider forward looking information.
What potential effects can be professionals expect from the regulatory measures?
G.S: At this point in time, it is too early to predict changes to the prudential framework related to the IFRS 9 implementation. There might be the need for some clarifications on the allocation of IFRS 9 Stage 2 Expected Credit Losses to the regulatory credit risk adjustments, i.e. the assessment whether those provisions can be treated as general credit risk adjustments or not. In the longer term, there might be a need to further develop the current regulatory Expected Loss logic.
How can businesses benefit from having early engagement?
S.C: Early engagement from IFRS 9 programmes, with the impacted business areas is absolutely crucial, whilst most programmes are being run from Group Finance and Group Risk, the introduction of the new accountant standard is going to very specific impacts and may indeed impact on products offered and pricing of those products going forward. Additionally, there is work and behaviours that can be changed in the BAU environment today, that will impact on the successful role out of the standard in January 2018.
What challenges can FIs expect with the upcoming IFRS 9 implementation?
S.C: The key challenge has to be quantity and quality of data, as well as the ability to implement slick and clean month / quarter end processes. This will be key to understanding and managing the impacts of volatility that will undoubtedly arise, especially In the infancy of the standard being introduced.
In your opinion, how is IFRS 9 looking effect the running of the business?
S.C: In my opinion, the standard will drive the need for consistency of practise across all business areas, it will also drive a culture of proactive rather than reactive credit management.
How can FIs benefit from implementing a good governance structure and embedding into the business?
S.C: FIs having a good governance structure should be a given and this is not particular to IFRS 9. The implementation of the standard does however create the opportunity to review both business and governance processes and to strengthen and re-emphasis where required.
How do you see the role of the accounting and credit risk experts change over the next 6-12 months?
N.W: Increasing amounts of change, unexpected events, and technology will require Accounting Professionals to be agile thinkers and demonstrate an array of skills and knowledge.
G.S: The implementation of the IFRS 9 ECL model requires a close coordination of accounting and credit risk experts in banks. A mutual understanding of both sides’ tasks and deliveries is key for the proper and on-time implementation of IFRS 9. While technical aspects of the model implementation have been in the focus of banks so far, in the future months accounting policy decisions will have to be taken and there will be a rising demand of stakeholders to be informed about the transitional impacts of the new impairment model.
S.C: The role of IFRS 9 professionals will evolve over the next 6 -12 months, as the implementation phase ramps up and business readiness is very much becomes the key to success. Communication, training to BAU and refinement to front line processes will become more focused over this time.
Neil Wannop, Head of Accounting Development, Lloyds Banking Group
Guido Sopp, Accounting Expert, Austrian Financial Market Authority
Samantha Cunningham, Head of Impairment – IFRS 9 Project, AIB